Monday, August 11, 2008

The grass is greener... in Sahara?!

With 3G being introduced, RCom has to avoid being the Vodafone of modern times...

The grass is always greener on the other side. If you’re wondering why we’re repeating this oft harped over remark, digest this – on one hand, Anil Ambani’s Reliance Communications is gearing-up for an African safari, while on the other, foreign players are all set for an Indian vacation with open 3G auctions.

With almost 7-8 million monthly additions to subsciber base, the domestic telecom industry, which currently runs on 2G platform, is further set to get a boost from all quarters with Indian policymakers allowing an open bid in its 3G space, with no limitations to foreign bids. As per a government official, “We have a 74% FDI limit in the telecom sector. Whether there is common auction or open auction, there will be no bar on foreign players. Either way, they will be allowed.” Though this open bid process will pose a challenge to many, a handful of players with Unified Access Services Licence (UASL) will find the battle for spectrum against ‘foreign powers’, easier.

While this is the twist to the tale at home, the ‘away’ telecom battlegame is also heating up with RCom signing a 45-day exclusivity agreement with MTN of South Africa to discuss a ‘potential combination’ of their businesses. If the deal goes through, we would have a $66 billion telecom conglomerate in the making that could challenge even the $33.33 billion Mcap of Japan’s NTT. Add to this a stupendous base of 115 million customers (as on March 2008) & a presence in 23 countries, and we have the largest global footprint in the world. The amalgamation of their balance sheets would also yield revenues to the tunes of Rs.58,100 crore, making it the second most profitable mobile operator in the world, only next only to China Mobile. Not just this, the operating profits of the new entity would also be close to a healthy Rs.25,000 crore. Even if one was to look at this deal from a competitive perspective, for Rcom, this deal would certainly help to outdo Bharti Airtel, its closest competitor.

Explaining the advantage to RCom, Harit Shah, Telecom Analyst, Angel Broking states, “RCom already has its presence in the African continent through its recently acquired FLAG Telecom and there would definitely be some synergies that they would stand to gain from...” However, there are a few challenges as well. The first and foremost being that MTN is a key GSM player, while RCom focusses primarily on CDMA technology. throwing light on this, a telecom analyst divulged, “Although Reliance Communications had got the license for GSM and is operating through GSM route in the North East region of India, it would an entirely different ball game to operate in the other parts of the world.” Then there is also the truth that shareholders of RCom are not convinced about the deal. Need a proof? On announcement, RCom’s shares fell by a 7.2% on BSE! Thirdly, South African telecom market is growing y-o-y at just 22% and already has a 70% penetration level. On the other hand, India is growing at a CAGR of an incredible 68% with penetration of just 21%. Hungry Vodafone made this mistake in 1999, when it paid a hefty sum for Germany’s Mannesman, a deal which turned sour. RCom can’t afford to be the modern Vodafone. As for Anil, he needs reasons to convince his shareholders to take a trip to Sahara!